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How the 114th Congress Can Advance Trade across the Pacific


By Derek Scissors


EXECUTIVE SUMMARY

This brief addresses four sets of trade challenges facing the 114th Congress and identifies specific actions Congress can take to address them.

Main Argument

It is critical that the 114th Congress carefully consider economic policy with Asia. Economic ties to Asia are large enough to influence American prosperity. For example, three of the top seven U.S. trade partners are in Asia—China, Japan, and Korea—with a combined volume of over $1 trillion in goods and services trade in 2013. For the 114th Congress, the major U.S.-Asia economic issues include trade promotion authority (TPA), the Trans-Pacific Partnership (TPP), U.S.-India bilateral relations, and U.S.-China bilateral relations.

Recommendations for the 114th Congress

  • A good TPA deal, such as the Baucus-Camp-Hatch draft, should be passed by Congress as quickly as possible. TPA frames U.S. international economic policy.
  • When finally completed, the TPP should be carefully vetted. Passing a sound TPP could be the most valuable action the 114th Congress takes. If unsound, the TPP must be rejected.
  • Congress should show patience concerning U.S.-India economic relations, as India is a long way from fulfilling its economic potential.
  • Congress should re-evaluate China, which faces serious economic problems. The top priority should be to stop Chinese theft of intellectual property.


HOW THE 114th CONGRESS CAN ADVANCE TRADE ACROSS THE PACIFIC

The scale of U.S.-Asia economic relations is enormous. Three of the top seven U.S. trade partners are in Asia—China, Japan, and Korea—with a combined volume of over $1 trillion in goods and services trade in 2013. [1] The value of two-way direct investment in 2013 between the United States and Asia was about $90 billion; those dollars will create jobs and generate income for years to come. [2] Three of the top six holders of U.S. Treasury bonds are in Asia. The recent changes in their holdings are minor, and their combined ownership of Treasuries exceeds $2.5 trillion. [3]

There is no need to call the 21st century “Asia’s century,” or something equally trite, to know that economic ties to Asia are large enough to matter to U.S. prosperity. The private sector should and does take the lead, but there are also obvious roles for Congress. For the 114th Congress, the major U.S.-Asia economic issues involve trade promotion authority (TPA) for the U.S. president, the Trans-Pacific Partnership (TPP), U.S.-India bilateral relations, and U.S.-China bilateral relations.

Trade Promotion Authority

It is extremely simple but worth keeping in mind: TPA is not solely or even primarily about President Obama. The next president will have more years under renewed TPA than the current one will. Further, while TPA is being conflated with the TPP, TPA is not solely about Asia either. TPA is about how Congress can shape U.S. international economic policy.

It is unfortunate that renewing TPA has been delayed while the TPP has been negotiated. Nonetheless, TPA can provide a measuring stick for an ensuing TPP vote. It would also guide the U.S. approach to a deal with Europe, any second round of TPP negotiations, and any other trade opportunities that appear between now and 2020.

The only TPA bill on the table at the time of writing is the Bipartisan Congressional Trade Priorities Act of 2014, introduced by former Senate Finance Committee Chairman Max Baucus (D-MT), current Senate Finance Committee Chairman Orrin Hatch (R-UT), and former House Ways and Means Committee Chairman Dave Camp (R-MI). [4] More than any other topic, this legislation emphasizes congressional access to information, a needed improvement. In terms of substance, agriculture receives the most attention in the text, with labor and environmental practices running second. The draft breaks some new ground, for example, in strengthening protections for cross-border data flows, which will enhance digital trade.

These are entirely reasonable priorities, but others are possible as well—for example, rules of origin and trade enforcement, [5] which are noted in the Baucus-Camp-Hatch bill but in briefer sections. Most important, the 114th Congress can tell both this president and the next what main objectives must be met for an agreement to be passed.

The trade topic that has received perhaps the most consistent congressional attention over the past decade is currency manipulation. It is true that many Asian countries rely on competitiveness in the U.S. market and have intervened to prevent their currencies from rising. The question is whether this should qualify as a congressional priority.

Japan, for example, was frequently accused of being a currency manipulator 30 years ago, and it is sometimes still called a currency manipulator today. But no proposed definition of currency manipulator can include today’s Japan because the country has run aggregate trade deficits for more than two years (see Figure 1). [6] Arguments that Japan might run surpluses in the future miss the fact that, as an aging society, the country produces less and less at home. On exchange rates, Japan cannot qualify as a genuine concern for U.S. policymakers.

FIGURE 1

Attention to Japan may just be a proxy for concern about Chinese currency manipulation. Prior to 2005, China first depreciated and then refused to appreciate its currency. U.S. unemployment was low. When China finally began heeding demands and pushed its currency higher, U.S. unemployment rose. [7] There is no evidence that currency manipulation, by itself, harms the U.S. economy. The way to make currency manipulation seem vital is to implicitly meld it with other issues, such as regulatory barriers that block U.S. goods and services. It is these issues, not exchange rates, that renegotiating TPA should focus on.

The Bipartisan Congressional Trade Priorities Act maintains existing language in previous U.S. trade legislation calling for an end to currency manipulation but not mandating action. This is both consonant with the International Monetary Fund and a better approach than demanding trade sanctions in what are supposed to be free trade agreements.

Finally, delays in TPA should not mean it is conflated with the TPP (acronyms notwithstanding). TPA is about establishing congressional priorities in guiding the administration on trade issues. The TPP is about whether a specific deal matches congressional priorities even though the administration negotiated it without congressional guidance. It therefore could be entirely reasonable to switch from approving TPA to rejecting TPP, or the reverse.

To address these issues, Congress should put its stamp on U.S. trade policy as soon as possible by introducing a reasonable TPA, such as the Bipartisan Congressional Trade Priorities Act of 2014.

The Trans-Pacific Partnership

Overview of the TPP

Notwithstanding the inevitable hype from both the pro- and anti- camps, the TPP will not profoundly change the U.S. economy for years. The biggest payoff of the TPP comes in its potential role as a blueprint for reorganizing world trade, a process which will take a decade even if successful.

Many opponents of the TPP mistakenly argue important U.S. policies will change. But the United States is already open—the TPP is a means to try to further open our partners’ economies. There are major disputes in intellectual property (IP), for example, but the TPP is highly unlikely to go too far in protecting IP, as the United States will have enough trouble bringing others close to its standard. [8]

On the flip side, short-term gains to the United States from the TPP will be minor. The negotiations involve three Asia-Pacific economies that are sizable players in U.S. trade, investment, and finance: Japan, Australia, and Singapore. The United States already has free trade agreements with Australia and Singapore. Short-term gains could only stem from Japan, and the fundamental market opening that Washington wants is very likely to be phased in over years, not pay off in 2016.

Looking toward 2017 and beyond, Japanese agriculture and services are areas for very large gains for the United States. [9] In addition, Vietnam and Malaysia have a combined population of almost 120 million people, and both economies could boast high growth for decades. Other payoffs from the TPP are potentially critical but also somewhat remote. A second round of TPP accession could include Taiwan (a major economic partner), the Philippines (a population of 100 million and sustained GDP growth over 5%), and others. A successful TPP will also serve as the template for later-starting trans-Atlantic negotiations. [10] If those can be concluded, the United States will have, at worst, created a higher-standard trade group involving all the world’s wealthy economies plus a number of others and, at best, pushed the entire world toward U.S. trade objectives.

Select TPP Issues

The current TPP negotiations involve dozens of issues, not all of which can be done justice here. A glance at trade data makes clear that the the United States’ comparative advantage lies in agriculture and advanced products such as aircraft, organic chemicals, plastics, and now refined petroleum (see Table 1). [11] This reflects unmatched American capacity for innovation. Trade agreements that do not protect the legal rights of genuine innovators and open agriculture markets are not worthwhile for the United States.

TABLE 1

Agriculture and IP. Less than a decade ago, agriculture and IP were invariably sidelined in trade negotiations, greatly reducing the value of trade agreements to most Americans and undermining popular support for them. In the TPP, U.S. negotiations must pry open Japanese agriculture markets and set a precedent for open agriculture trade globally. The timeframe for this can be an extended one; the key is that major products such as wheat are fully liberalized.

Innovation is a more multifaceted topic, but raising the bar for IP protection in lagging countries such as Vietnam is an obvious goal. So is greater protection of trade secrets from predatory government behavior. [12] The TPP will not be and does not need to be perfect on innovation issues. But it must both make progress on multiple fronts and ensure that IP is a core part of future negotiations both regionally and globally.

Rules of origin. Among other TPP provisions, there are several that have not received enough attention. The starting point of all free trade agreements is rules of origin—what goods and services will be subject to the improved treatment in the agreement and what will be left out as coming from other parties. Rules of origin that are too loose mean countries that are not parties to the deal can free ride. Rules that are too tight create trade blocs. Perhaps most importantly, complex rules are ignored by business participants, neutering trade agreements entirely. [13]

Rules of origin have grown in importance with the increasing prominence of global supply chains. Some supply chains will shift if the TPP is implemented, as should happen with a truly liberalizing agreement. What should not happen is that rules of origin be turned into an instrument of protectionism by any TPP member. In late 2011, the TPP countries agreed on sound principles to govern rules of origin. [14] Those should remain the baseline.

State-owned enterprises. An issue that has receded but could all too easily re-emerge is the advantages granted by governments to their state-owned enterprises (SOE). Ideally, SOEs would be banned, but this is plainly not achievable in the foreseeable future. One practical response is “competitive neutrality”—attempting to ensure that SOEs are not handed an overall competitive advantage versus private companies.

True competitive neutrality is impossible. For one thing, SOEs do not face the same threat from bankruptcy that private companies do. The variants of competitive neutrality adopted by some developed economies over the last decade are largely voluntary, reliant on governments recognizing the drawbacks of SOEs. Such an approach is woefully inadequate for the first round of the TPP, much less any expansion. TPP provisions should include both limitations on the number and scope of SOEs and mandatory restrictions on support of SOEs—for example, in purchasing or sales prices. [15]

U.S. market barriers. U.S. market barriers are an important topic that may be particularly unpleasant for Congress. While the TPP is primarily about lowering foreign market barriers, there are a few areas where U.S. barriers not only block trade but hand the United States’ partners a ready excuse for their own, more sweeping protectionist measures. U.S. quotas on sugar, [16] for example, are constantly cited when the United States calls for more access for its corn or meat.

Cheap textile imports lower the price of clothing for the poor and can even create jobs in the United States on a net basis. [17] The U.S. textile industry is very small and should not be allowed to derail trade liberalization. A similar story can be told about maritime services—the Jones Act sharply limiting foreign participation is outdated, harms the economy as a whole to benefit a few shipping companies, and hurts U.S. negotiating positions in the TPP and beyond. [18]

Investor-state dispute settlement. Other provisions, such as that concerning investor-state dispute settlement, are not especially important. While controversial, investor-state dispute settlement will most likely turn out to be a nonissue. No country—not the United States or its partners—will permit infringement of its sovereignty in the TPP or any other trade agreement. Critics concerned over this need not be, and businesses expecting a shield against foreign governments will very soon learn otherwise.

Congress should evaluate the TPP on the basis of whether it advances agriculture trade, protects IP, and expands competition. As the next step in this process, members of Congress should immediately request both full access to and permission to publicly discuss TPP chapters.

India on Hold

In the U.S.-India bilateral relationship, the interests of American business diverge somewhat from the interests of the country. Business criticisms of India are usually justified. New Delhi inhibits progress at the WTO, [19] is openly protectionist in agriculture when it can get away with it, frequently ignores IP in pharmaceuticals, [20] blocks foreign competition in banking for the sake of its state-owned banks, and takes other actions at odds with U.S. trade and investment goals.

The catch is that India is simply not that important economically—not now, not in the next two years, and even possibly not in the next twenty years. The population is huge but its buying power is very small. India presently accounts for less than 2% of total U.S. trade, and Indian wealth per household is less than 5% of U.S. wealth per household. [21] It could take decades for India to matter economically to the United States.

If India’s rise is to happen quickly, it will depend on wrenching economic reform that is purely internal to India. For instance, no country has ever become rich without clear individual rights to land, yet rural Indians are routinely denied these rights. [22] Indian manufacturing is stunted because most companies cannot fire workers without government permission, so they decline to hire them. [23] India does not have a proper national economy; rather, it has a group of state economies that often discriminate against each other. [24]

These are difficult, controversial matters on which a prickly India will resent any interference from the United States. In contrast, U.S. concerns in the relationship are peripheral, even a bit counterproductive. Should patent rights for U.S. pharmaceuticals come before land rights for impoverished Indians? Should Indian states be more open to U.S. goods and services than they are to each other?

The United States will benefit far more from internal Indian economic reform than from the improved treatment business seeks. It would be better to see the buying power of Indian consumers soar thanks to land ownership and job creation than to win a larger U.S. share of what remains a small market.

It is possible that internal and external reform could occur simultaneously, as long as the former is understood as always having priority. The Obama administration and its successor should negotiate a bilateral investment treaty (BIT) with India, but strictly as a long-term project, awaiting the changes India must make for a BIT to be realistic and valuable. If India cannot move forward, a BIT and other initiatives offer little. If India can sustain powerful reform, then the United States’ negotiating objectives will shift considerably as the Indian economy evolves.

Given domestic politics in India and the current state of bilateral relations, the 114th Congress should not anticipate major action on the U.S.-India economic relationship. Instead, Congress should practice patience with respect to India.

A Different China

In the 1990s, Congress faced a China that was not especially important economically but was rising quickly. In the 2000s, China was both big and fast. In this decade, China is a huge player, but its rise has slowed to the point of no longer being discernible. The way Congress thinks about China needs to change accordingly.

China is the second-largest U.S. trading partner after Canada. When indirect purchases through Belgium and the like are included, it is the largest foreign holder of Treasury bonds. Chinese investment in the United States outside of Treasuries is much smaller but on some counts has set new records for three years running. [25] And all this has happened essentially in less than twenty years.

The next twenty years will be very different, however. With disposable income per person at $3,300 in 2014, China is far from rich (see Figure 2). [26] Similar to Japan and Europe, and to a lesser extent the United States, its population is aging. [27] It has run up huge debts in a short period of time. [28] China has also abused its resource base. [29] The middle income trap, where countries move smartly out of poverty then get stuck, looms large on the horizon. [30]

FIGURE 2

The solution is market-driven reform, the kind Beijing put aside in the previous decade. [31] The Communist Party grandly announced a new reform program in late 2013, but the steps taken to date are completely inadequate to meet the scope of the challenges faced. An internal purge, known as the “anti-corruption campaign,” may or may not clear the decks for more intense reform. Setting aside regional security concerns, China will either stagnate or be preoccupied economically with internal change for some time to come.

As a trade competitor, China suffers from rising wages and apparently weakening productivity. [32] It will no doubt still block access to its market for the sake of protecting SOEs. But this simply will not matter as much as in years past as Chinese competitiveness ebbs.

The action for Congress is outside of traditional trade issues. Cyber and other IP theft is by far the single biggest problem in the U.S.-China economic relationship. [33] As noted, IP is at the heart of the United States’ comparative advantage. Countries are supposed to respect IP more as they advance technologically and innovate on their own, but China has instead used its improving technology to conduct commercial cybertheft on a huge scale.

Washington needs leverage in this area, and it has some. Partly due to the problems at home, Chinese firms are increasingly interested in investing in the United States. The individual investments have a voluntary U.S. partner, are good for the United States, and should not be hampered. However, sustained easy access to the country should be conditional on reduced Chinese commercial cybertheft.

There are multiple approaches to investment and cybertheft, but the best route is through the BIT negotiations now in progress. [34] A BIT will not transform China and should not be packaged as doing so. But the greater speed, transparency, and investment protection China seeks should only be granted to a good economic partner, and commercial cybertheft is the area where Beijing most needs to improve.

Congress should recognize that both China and the bilateral economic relationship have changed. As a first step forward, it needs to make clear to the administration that a BIT must effectively address cybertheft or it will be rejected.


Endnotes

[1] U.S. Census Bureau, “U.S. International Trade in Goods and Services Report,” January 7, 2015, http://www.census.gov/foreign-trade/data.

[2] “Interactive Data,” U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/itable/index.cfm.

[3] U.S. Department of the Treasury, “Major Foreign Holders of Treasury Securities,” table, January 16, 2015, http://www.treasury.gov/ticdata/Publish/mfh.txt.

[4] “Baucus, Hatch, Camp Unveil Bill to Bring Home Job-Creating Trade Agreements,” U.S. Senate Committee on Finance, Press Release, January 9, 2014, http://www.finance.senate.gov/newsroom/chairman/release/?id=7cd1c188-87f1-4a0b-8856-3fc139121ca9.

[5] Trade Facilitation and Trade Enforcement Reauthorization Act of 2013, S.662, 113th Cong. (2013), https://www.congress.gov/bill/113th-congress/senate-bill/662.

[6] “Japan Trade Deficit Grows Despite Drop in Imports,” Associated Press, December 16, 2014.

[7] Derek Scissors, “The Facts about China’s Currency, Chinese Subsidies, and American Jobs,” Heritage Foundation, Backgrounder, no. 2612, October 4, 2011, http://thf_media.s3.amazonaws.com/2011/pdf/bg2612.pdf.

[8] “Frequently Asked Questions on Intellectual Property and Public Health Issues,” Department of Foreign Affairs and Trade (Australia), http://www.dfat.gov.au/fta/tpp/faq.html.

[9] Jeffrey J. Schott, “The United States, Japan, and the Trans-Pacific Partnership” (paper presented at a conference held by the High-Level Working Group on Japan-U.S. Common Economic Challenges, Washington, D.C., June 2, 2014).

[10] European Commission, “EU Negotiating Texts in TTIP,” January 7, 2015, http://trade.ec.europa.eu/doclib/press/index.cfm?id=1230.

[11] U.S. Census Bureau, “U.S. International Trade Statistics,” http://censtats.census.gov/cgi-bin/naic3_6/naicCty.pl.

[12] Brian T. Yeh, “Protection of Trade Secrets: Overview of Current Law and Legislation,” Congressional Research Service, CRS Report for Congress, R43714, September 5, 2014, http://fas.org/sgp/crs/secrecy/R43714.pdf.

[13] Akira Kotera, “What Is the ‘Spaghetti Bowl Phenomenon’ of FTAs?” Research Institute of Economy, Trade & Industry, May 23, 2006, http://www.rieti.go.jp/en/columns/a01_0193.html.

[14] “Outlines of TPP,” Office of the United States Trade Representative (USTR), November 12, 2011, https://ustr.gov/tpp/outlines-of-TPP.

[15] Derek Scissors, “Why the Trans-Pacific Partnership Must Enhance Competitive Neutrality,” Heritage Foundation, Backgrounder, no. 2809, June 6, 2013, http://thf_media.s3.amazonaws.com/2013/pdf/bg2809.pdf.

[16] “Sugar,” USTR, https://ustr.gov/issue-areas/agriculture/sugar.

[17] Dereck Scissors, Charlotte Espinoza, and Terry Miller, “Trade Freedom: How Imports Support U.S. Jobs,” Heritage Foundation, Backgrounder, no. 2725, September 12, 2012, http://www.heritage.org/research/reports/2012/09/trade-freedom-how-imports-support-us-jobs.

[18] Justin Lewis, “Veiled Waters: Examining the Jones Act’s Consumer Welfare Effect,” Issues in Political Economy 22 (2013): 77–107, http://www.elon.edu/docs/e-web/students/ipe/volumes/Lewis%202013.pdf.

[19] David Brunnstrom and Tom Miles, “India’s Demands Block $1 Trillion WTO Deal on Customs Rules,” Reuters, August 1, 2014, http://in.reuters.com/article/2014/08/01/india-trade-wto-idINKBN0G02GV20140801.

[20] Amy Kazmin, “India Assumes Frontline Position in Battles over Intellectual Property Rights,” Financial Times, December 10, 2014, http://www.ft.com/intl/cms/s/0/2cc8d306-6f3b-11e4-8d86-00144feabdc0.html#axzz3PfrxMnHL.

[21] “Village Households’ Average Assets at Rs 10 Lakh,” Economic Times, December 19, 2014, http://articles.economictimes.indiatimes.com/2014-12-19/news/57233399_1_rural-households-cent-india-debt.

[22] Bikash Singh and Sutanuka Ghosal, “Tea vs. Rubber: Suspicion over Move to Amend the Tripura Land Reforms and Land Revenue Act, 1960,” Economic Times, December 21, 2013, http://articles.economictimes.indiatimes.com/2013-12-21/news/45444364_1_tea-planters-tea-gardens-dhunseri-tea.

[23] Arvind Panagariya, “What India Must Do to Modernize,” Centre for Economic Policy Research, Vox, January 15, 2008, http://www.voxeu.org/article/why-india-lags-behind-china.

[24] “West Bengal’s Ban on Vegetable Exports Is Retrograde,” Economic Times, November 4, 2013, http://articles.economictimes.indiatimes.com/2013-11-04/news/43658672_1_onion-crop-onion-market-onion-shortage.

[25] Derek Scissors, “A Third Straight Record for Chinese Investment in the U.S.,” Real Clear Markets, January 12, 2015, http://www.realclearmarkets.com/articles/2015/01/12/a_third_straight_record_for_chinese_investment_in_the_us_101475.html.

[26] “China’s Economy Realized a New Normal of Stable Growth in 2014,” National Bureau of Statistics of China, January 20, 2015, http://www.stats.gov.cn/english/PressRelease/201501/t20150120_671038.html.

[27] Wang Xiaodong, “Family Support Planned for Aging Population,” China Daily, December 4, 2014, http://www.chinadaily.com.cn/china/2014-12/04/content_19024750.htm.

[28] “The Great Hole of China,” Economist, October 18, 2014, http://www.economist.com/news/leaders/21625785-its-debt-will-not-drag-down-world-economy-it-risks-zombifying-countrys-financial.

[29] Dexter Roberts, “Think the Air Pollution Is Bad? China Faces a Water Contamination Crisis,” Bloomberg Businessweek, November 19, 2014, http://www.businessweek.com/articles/2014-11-19/chinas-water-supply-is-contaminated-and-shrinking.

[30] Barry Eichengreen, Donghyun Park, and Kwanho Shin, “Growth Slowdowns Redux: New Evidence on the Middle-Income Trap,” National Bureau of Economic Research, Working Paper, no. 18673, January 2013, http://www.nber.org/papers/w18673.

[31] Derek Scissors, “Deng Undone: The Costs of Halting Market Reform in China,” Foreign Affairs, May/June 2009, http://www.foreignaffairs.com/articles/64947/derek-scissors/deng-undone.

[32] Harry X. Wu, “China’s Growth and Productivity Performance Debate Revisited—Accounting for China’s Sources of Growth with a New Data Set,” Conference Board, Economics Program, Working Paper, January 2014, https://www.conference-board.org/pdf_free/workingpapers/EPWP1401.pdf.

[33] Commission on the Theft of American Intellectual Property, The IP Commission Report (Seattle: National Bureau of Asian Research, 2013), http://www.ipcommission.org/report/ip_commission_report_052213.pdf.

[34] “U.S.-China Economic Relations,” White House, Office of the Press Secretary, Fact Sheet, November 12, 2014, http://www.whitehouse.gov/the-press-office/2014/11/12/fact-sheet-us-china-economic-relations.


Derek Scissors is a Resident Scholar at the American Enterprise Institute, where he studies Asian economic issues and trends. Dr. Scissors is also an Adjunct Professor at George Washington University, where he teaches a course on the Chinese economy.